If a deal between Microsoft and Yahoo happens it'll be because of two chief financial officers--Sue Decker and Christopher Liddell.
Decker (left), arguably the heir apparent to CEO Terry Semel at Yahoo, is considered to be the most valuable executive at the company. She's currently acting CFO and runs the advertiser and publishing group. Decker is driving the strategy and on Yahoo's most recent earnings conference call she garnered most of the questions.
Decker is well known and is assuming a broader role at Yahoo as the company drives the Panama ad system and tries to close the Google monetization gap. She was also front and center as Yahoo bought Right Media. Rest assured Decker will play a big role if formal negotiations happen (see Techmeme for roundup and Forrester's Charlene Li on what works and doesn't).
Less is known about Liddell (left), who joined Microsoft in April 2005 to be CFO. He had been CFO at International Paper and CEO of one of New Zealand's largest companies, Carter Holt Harvey. On Microsoft earnings conference calls, Liddell has availed himself well and has been a straight shooter.
So why is Liddell so interesting amid all this Yahoo acquisition talk?
He knows how to manage a balance sheet, has reorganized companies and at Carter Holt Harvey engineered a series of acquisitions and divestments. At International Paper, he also was at a company that had debt. Debt? Now why would that be important to Microsoft, a company that has gobs of cash and has been debt free?
Debt could play a role in the Yahoo deal. If reported prices are correct ($50 billion to $60 billion) it's highly unlikely that Microsoft would drain its entire cash pile, which was north of $28 billion as of March 31. Just as bad would be issuing a ton of shares that would dilute earnings. Microsoft aggressively buys back share to minimize the financial hit of stock options.
Given that landscape, it's likely that Microsoft will pay mostly cash for Yahoo and finance it with debt. Silicon Valley companies typically don't issue bonds but Wall Street loved debt issues put out by Cisco and Oracle. Microsoft would be an instant A-lister in the bond market.
This debt would arguably make better use of Microsoft's balance sheet, which doesn't thrill investors. Sure it offers a dividend, but if Microsoft were smaller private equity shops would be circling the company so it could "lever up" the balance sheet.
And Liddell understands debt. The last quarter at International Paper, Liddell's balance sheet had $13.5 billion in long-term debt. In 2004 International Paper had more than $14 billion in long-term debt. In 2003, International Paper had long-term debt of $13.4 billion. All of those tallies come from regulatory filings with the Securities and Exchange Commission.
Now all of this debt talk is way out of character for traditional Microsoftees. But it's a new Microsoft. Its employee base is massive and resembles that of a conglomerate than a software company. Meanwhile, Microsoft operates more like a conglomerate--it lets its Xbox group run free and most divisions are companies to themselves.
In keeping with the new way of doing things Microsoft could acquire Yahoo and run it as a separate unit. Microsoft is more General Electric than people think.
Another key reason the CFOs at Yahoo and Microsoft will be critical any deal is cost savings. On first glance, operations show a lot of overlap--at least on the Web media side. However, that's not the right game--a combined company will be one with a multiple brand, multiple channel message. But rest assured Wall Street will demand cost savings. That's where Liddell and Decker come in again.
Here are some key areas to watch as the financial types mix it up:
- Technology: Deutsche Bank analyst Jeetil Patel argues that Yahoo hasn't invested enough in its underlying technology and product development. "Microsoft has the technical talent/resources to reinvigorate Web product development," says Patel. A consolidation would save on research and development.
- Infrastructure: Both companies are spending heavily on data centers--a combined firm would save money by consolidating efforts.
- Talent: While Yahoo is a big company it isn't that big with a little more than 11,000 employees as of Dec. 31, 2006. Microsoft had 71,000 at the end of its fiscal year last June. Both companies would save a lot of bidding wars against each other by combining forces.
- The diversion factor: Yahoo could run the MSN unit and largely be independent. That would leave Microsoft to focus on new applications beyond Windows and Office.